Starting to invest

Investing hasn’t replaced baseball as the national pastime. But it’s increasingly a part of many people’s financial lives. That’s true in part because people often begin investing by putting money into an employer-sponsored retirement savings plan. But it’s also true that investing gets a lot of attention in the media, so people are more aware of the role it can play in their lives.

Perhaps the greatest challenge in investing — whether you have lots of experience, you’ve just started, or you’re uncertain about how to begin — is finding the information you need to make financial decisions confidently. Among other things, that includes knowing how to choose what investments to buy, which ones to keep, and when to sell. The next challenge is translating your knowledge into action.

Save or invest?

Investing isn’t the same as saving. When you save, you want to protect your assets and ensure that you’ll have enough money to cover financial emergencies. When you invest, your goals are more ambitious. You want to increase the value of your principal — the money you invest — or provide a source of income for the present or the future. In many cases, you may want to accomplish both goals. At the same time, investing means you have to be willing to accept risk, wait out market downturns, and face the potential loss of some of your assets, to achieve the results you seek. That’s not the case with insured bank accounts, which virtually eliminate risk to your principal, but provide limited growth or income.

Take responsibility

The first step toward financial security is to recognize the financial responsibilities that you face now, and those you are likely to encounter in the years ahead. Then you need to educate yourself about investing. The more you know about selecting investments and building a portfolio, the easier managing your finances and reaching your financial goals is likely to be.

Can you afford to invest?

Many people who don’t invest think investing is only for rich people. This simply is not true. Some mutual funds allow you to invest as little as $100 or sometimes less at a time after an initial investment of $2,500 to $3,500. Still, creating an investment plan can be intimidating. If you are having trouble getting started, you might want to consider the slow and steady approach. If you are earning $40,000 a year, for example, putting aside 5% of your income means just $5.50 a day. By the end of the year, you’ll have enough to invest $2,000 in an individual retirement account (IRA) – a sizable investment without much sacrifice. And for $15.07 a day, you’ll put away enough to make the maximum IRA contribution for 2017, which is $5,500.

Set goals

Investing usually begins with creating a financial plan that sets out the goals that you want to achieve. The plan can be a formal document or simply a list of things you wish to do in the future. But it must include the financial steps you’ll take to achieve them.

Some will be short-term goals, like paying for graduate school, buying a new car, making a down payment on a home, or starting a new business. Others are mid-term goals, like sending your children to college, paying for extended travel, or purchasing a second home. Finally, there are long-term goals — most notably, planning for a comfortable and secure retirement.

Start now

There’s no perfect time to invest, but the sooner you start, the more time your assets have the potential to grow. Not only can you add money to your investment accounts for a longer period, but you can afford to take more financial risks, with the corresponding potential for larger returns. And you can ride out the inevitable downturns in the investment markets, giving your portfolio time to regain any lost value. But remember, it’s never too late to start investing either.

Stick with it

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While past results can’t guarantee what will happen in the future, stocks and the mutual funds and exchange traded funds that invest in stocks have provided stronger returns over the long term than cash or fixed-income investments.

That’s been due to their potential to increase in value and to compounding (see chart on right), which occurs when investment earnings — in this case stock dividends and sometimes capital gains — are reinvested to produce a new base on which future earnings can accumulate. However, in contrast to fixed income investments, equity investments generally are more volatile and carry greater risk of losing money.

Take advantage of tax-deferred plans

If you’re putting money into an employer sponsored retirement plan, an IRA, or a tax-free educational savings plan, you’re already investing for the future in one of the most potentially productive ways you can. That contribution may be most, or even all, of what you feel you can put away. Yet the truth is, being able to afford the kind of long-term security you want will depend, in most cases, on the personal investments you make in addition to the money you put into these plans. If you don’t start until your financial goals are within sight, it’s tough to invest enough to produce the income you’ll need to pay for them.